Lets play,,,,, the weakest link

* "The weakest link" was a gameshow running in the UK quite a few years back. A quite harsh program voting out the contestants percieved to be the "weakest links" in a group.
This can now be applied to the Eurozone, but with a different twist. We already know who the weakest links are; the PIIGS countries. However, they are currently supported by the Eurozone
rescue fund, the EFSF (The European Financial Stability Facility).
At the european head of state meeting in October, a proposal will be made to upgrade the rescue fund to a permanent tool.
The EU commission has already suggested that the EFSF should be made permanent.

What about the weakest link theme?
Well, if this proposal gets a green light, the implications are quite substantial for Eurozone surplus and deficit countries. The deficit countries are essentially written a blank check. This obviously includes a substantial moral dilemma and much increased risks of being abused.
As financiers, the surplus countries are at risk of getting massively increased bills. At some point this will become too much. If they cave in, the Eurozone implodes. Hence, in this context, the surplus countries will come under massive pressure. Amongst the surplus countries, the most important is Germany. All in all -the weakest link is,,,,,Germany.

Currently, the market doesnt care about these consequences, but prefer to focus on the inner EMU yield pick up play due to the "successful" peripheral bond auctions- and the EU commission proposal of making the EFSF permanent. Strenghtening the Eur in the process.


However, expect Germany to be on collision course with the Eurozone deficitcountries as they obviously has no interest whatsoever to migrate the peripheral countire's debt burden to Germany. I expect implied volatilities for eurozone assets to pick up in the run up to this meeting. The outlier risk is for a drastically weaker Eur.


*The Peripheral bond rally - enjoy it while it lasts, but take your profits in time for the European heads of state meeting.
With the EU commission proposal of making the EFSF permanent, the peripheral high yielders will be perceived as very attractive, reminiscent of a "free lunch". A word of caution will be in place.
The bets are increased and hence the risks are rising in the Eurozone game. The perception that governments and centralbanks will be able to sort out a growing mountain of debt may hold as long as a good cashflow/high growth remains. This assumption is very uncertain in itself. Add to that the necessity for growth to increase further in order to service the rising debt and it is not very difficult to imagine a situation where this spirals out of control.
Especially if the anchor funding entity of them all, Germany - balks.



* New positions and position changes
I view the recent Eur rally as overdone and have taken profit. I see Equity markets vulnerable for a pullback.

- Took profit and reversed position on Eur/Usd.
- Took profit and reversed position on Gbp/Usd.
- Took profit and reversed position on Eur/Jpy.
- Went long on various bearish Equity ETF;s.


As always good luck.









The comments and posts published in this blog ARE NOT trading recommendations. They can NEVER be considered as trading calls or advices. If you decide to use the information offered here for your real trading it is at your own risk.Trading on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.Errors and Omissions may occur.Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice."www.todaysmacrotrading.blogspot.com" will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.© 2008 "www.todaysmacrotrading.blogspot.com:The traders blog" All Rights Reserved.

Reversing Eur/Usd ,Gbp/Usd

* I am reversing Eur/Usd and Gbp/Usd into long positions
Closing short Gbp/Chf and going long Eur/Jpy.


More later.
As usual, good luck


The comments and posts published in this blog ARE NOT trading recommendations. They can NEVER be considered as trading calls or advices. If you decide to use the information offered here for your real trading it is at your own risk.Trading on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.Errors and Omissions may occur.Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice."www.todaysmacrotrading.blogspot.com" will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.© 2008 "www.todaysmacrotrading.blogspot.com:The traders blog" All Rights Reserved.